Damming the river by feeling the stones: external shocks and policy adaptation in China’s Mekong hydropower policy

Abstract

This article considers the puzzle of how and why given the challenge of information asymmetry between the state (the principal) and Chinese state-owned enterprises (the agents) Beijing identifies flaws in its foreign policies. We seek to explain changes in China’s foreign economic policy and Chinese SOEs’ strategic response to those changes as reflected in their business approach. Drawing on historical institutionalism, we construct an explanatory framework that we label ‘implementation, shock, learning, and adjustment (ISLA)’. We apply this framework to examine the implementation record of Chinese hydropower contracts in the Mekong region over the past two decades. This illustrates a policy adaptation process that depends heavily on the impact of ‘external shocks’ that lay bare key risks to China from the current policies guiding SOEs’ overseas activities and lead Chinese authorities to make policy changes. Our findings suggest that these policy changes emphasize greater regulatory compliance by Chinese dam-building firms while leaving Beijing’s major policy goals in place. Thus, the ‘shocks’ affecting Chinese dam-building in the Mekong have not led the Chinese leadership to reduce incentives for external business expansion. Rather, Beijing has boosted its intervention, built out its regulatory restrictions, and added security authorities’ involvement to both the hydropower and non-hydropower sectors, at home and abroad. We observe that key measures were introduced after the mid-2010s as Beijing faced growing geopolitical competition from the United States and Japan, and sought to prevent further shocks and repercussions caused by those firms’ activities in the region. China’s increasingly security-centric policy has led dam-building SOEs to alter their business approach, even though its effectiveness in overcoming information asymmetry remains unclear.